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| Clearing houses | |
|---|---|
| Name | Clearing houses |
| Established | Various dates |
| Founder | Various institutions |
| Type | Financial infrastructure |
| Location | Worldwide |
Clearing houses are specialized financial institutions that intermediate, reconcile, and settle transactions between counterparties, reducing counterparty risk and ensuring the orderly completion of trades. Originating in merchant markets and commodity exchanges, they evolved into central nodes in payments, securities, and derivatives systems, interfacing with banks, brokers, exchanges, and regulators. Their roles intersect with major institutions and events such as Bank of England, Federal Reserve System, Wall Street Crash of 1929, Basel Committee on Banking Supervision, and European Central Bank.
Clearing arrangements date to early modern trade centers like Amsterdam and London, where merchants and brokers developed bilateral reconciliation practices later formalized in institutions such as the London Clearing House and the New York Clearing House. The 19th century saw growth alongside venues like the London Stock Exchange and the New York Stock Exchange; crises including the Panic of 1907 and the Great Depression accelerated reforms leading to centralized procedures. Post-World War II developments involved international coordination through bodies such as the Bank for International Settlements and the International Monetary Fund, while late 20th-century innovations responded to events including the Black Monday (1987) crash and the Global Financial Crisis of 2007–2008 which prompted regulatory action by the Financial Stability Board and influenced legislation like the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Clearing entities perform novation, netting, settlement, margining, and position reporting for markets such as those operated by the Chicago Mercantile Exchange, NASDAQ, and London Metal Exchange. They act as central counterparties (CCPs) that interpose between buyers and sellers, providing guarantees backed by default funds, variation margin, and initial margin frameworks modeled on standards from the Committee on Payments and Market Infrastructures and recommendations by the Basel Committee on Banking Supervision. Operational links to central banks such as the Federal Reserve Bank of New York enable liquidity provision, while settlement links to depositories like The Depository Trust Company and Euroclear ensure transfer of securities and cash. Clearing processes employ multilateral netting algorithms, trade confirmation workflows, and payment-versus-payment or delivery-versus-payment mechanisms in coordination with entities like SWIFT.
Different markets require specialized clearing arrangements: payments clearing through systems such as CHAPS and TARGET2; securities clearing via organizations like Euroclear Bank and Clearstream; derivatives clearing by CCPs such as those run by LCH, CME Group, and ICE Clear; commodity and energy clearing at venues tied to the Intercontinental Exchange; and bilateral or multilateral trade repositories influenced by rules from the Commodity Futures Trading Commission and the Securities and Exchange Commission. Clearing can be intra-day, end-of-day, continuous linked, or batch-processed depending on market structure exemplified by exchanges like the Tokyo Stock Exchange and Hong Kong Stock Exchange.
Risk controls include margining, default fund contributions, stress testing, position limits, and recovery and resolution planning mandated by authorities such as the European Securities and Markets Authority, Office of the Comptroller of the Currency, and national central banks including Deutsche Bundesbank. Regulatory frameworks built on Basel III capital standards and CPMI-IOSCO guidance address credit, liquidity, operational, and systemic risks. Cross-border issues involve coordination between regulators in jurisdictions like Switzerland, Japan, Singapore, and Australia to manage interoperability, data sharing, and extraterritorial oversight, often mediated by memoranda of understanding involving the International Organization of Securities Commissions.
Automation, electronic matching, and straight-through processing have transformed clearing operations at platforms such as Nasdaq OMX and CME Group. Distributed ledger technology trials have involved consortia including R3 and initiatives by central banks such as the Bank of England and the European Central Bank exploring central bank digital currency interactions with clearing and settlement. Algorithmic risk controls, machine learning for anomaly detection, cloud migration by firms like Amazon Web Services and Microsoft Azure, and cybersecurity frameworks influenced by standards from NIST affect resiliency. Efforts to reduce settlement cycles—from T+3 to T+2 and proposals for T+1—were implemented by markets including NYSE and TSX to lower exposure.
Prominent clearing organizations include LCH, CME Clearing, ICE Clear Europe, The Depository Trust Company, Euroclear, Clearstream Banking S.A., China Securities Depository and Clearing Corporation Limited, Japan Securities Clearing Corporation, and national payment systems such as CHIPS and Fedwire. Regional initiatives such as TARGET2-Securities and infrastructure projects coordinated by the European Central Bank and the Association of Southeast Asian Nations highlight cross-border settlement efforts. Historical firms like the New York Clearing House played foundational roles in developing practices that underpin modern institutions including central banks and multilateral supervisory bodies.
Critics argue that centralization concentrates systemic risk, creating single points of failure as debated after the Lehman Brothers collapse and during responses by the Federal Reserve and European Central Bank. Concerns about competition, governance, cross-border jurisdiction, and access arise in disputes involving firms and regulators such as the Securities and Exchange Commission, Commodity Futures Trading Commission, and national competition authorities. Privacy and data sovereignty controversies surface in international arrangements between entities in United States, China, and European Union jurisdictions. Debates continue over mandatory clearing requirements under laws like Dodd–Frank Act and equivalence determinations by the European Commission affecting market structure, systemic resilience, and the balance between centralization and market-based risk allocation.
Category:Financial infrastructure